Tag Archives: biotech

Trinity Meltdown

In May last year I posted on an undisciplined investment, Trinity Biotech (TRIB), which I bought at $21 per share and, after ignoring some basic investing rules, didn’t sell until it hit $16. I had thought that the underlying metrics of TRIB existing business would improve, with a big upside potential with the FDA approval of its Meritas Troponin Point-of-Care test (as outlined in this post). Since last year, I have kept an eye on the firm as their operating results continued to be uninspiring, as per the graph below.

click to enlargetrinity-biotech-2011-to-q22016-revenue-operating-profit

I continued to monitor the firm from afar to see how the FDA approval was progressing, for curiosity sake more than anything else (the investment case was similar a coin toss given the operating results and I have, thankfully, grown out of such gambles). The timing of any final approval was dependent upon FDA queries but Q4 was been talked of as a possible time for a final FDA decision.

It has therefore come as a considerable shock to all stakeholders, and a 50% collapse in the share price, when TRIB announced early on Tuesday that it has withdrawn its FDA application for the Troponin test on the advice of the FDA itself. Analysts representing investors vented their anger at the company’s management on the conference call on the news (worth a listen if you are so inclined).

I genuinely felt sorry for management as they tried to explain the “devastating news” about how they could have got the FDA approval so wrong. Although the FDA would not go into the gritty details on a 30 minute call communicating the news to management behind their “minded to refuse” position, TRIB’s management were restrained in expressing their (obviously very disappointed) view that the FDA had moved the goal posts in their assessment criteria. The FDA will give TRIB more detail on their decision over the coming months (strangely only on the condition that TRIB withdrew their application).

Management expressed their view, based upon the information from the FDA call, that any new application was unlikely given the large R&D expenses needed to address the issues raised and announced they would shutter the programme, reducing their annual capitalised expenses from $9 million to $1.5 million including the closure of their Swedish facility. Given they capitalise most of these expenses, the impact will primarily be on cash-flow rather than on the P&L (they may manage to be cash-flow neutral on a pro-forma basis).  Insight into future operating results and what the balance sheet will look like after the write-offs needed on this withdrawal may come with the Q3 results.

At a share price of approx $6.50, TRIB indicated that their Board would likely instigate a large buy-back programme after the early release of their Q3 results (likely due by mid October). With $85 million of cash left from their $100 million convertible debt, TRIB has the firepower if it can get to positive cash-flow on an operating basis in the near term. Analysts were very blunt in their reaction, stating that management now had a major credibility issue and that a sale of the firm should now be the priority.

All in all, a sad day for TRIB, its employees and its future prospects. And, of course, for its shareholders.

A visit to the dentist

Last week, Raghuram Rajan, the current governor of the Indian Central Bank and the author of the excellent book Fault Lines, warned about asset prices and macro-economic policies in the developed world. Rajan said that things may work out if “we can find a way to unwind everything steadily” but added “it is a big hope and prayer” and that the reality of history is one of sudden movements and volatility. Also this week, hedge fund manager David Einhorn said that his fund was having “difficult time finding new investments this quarter” and that “as the market continues to rise in the face of conflicting economic data, global unrest, and looming overdue Fed exit from quantitative easing we remain cautiously positioned”.

As regular readers will know, I am also wary about valuations in the current market which seem to be largely driven by the lack of return as a direct result of macro-economic policy (see Buttonwood post). I am comforted by the fact that, as a part-time investor, I am not bound by the pressures that professional money managers have in the beauty parade that is the relative annual performance competition. So that affords me and other part-time investors (our own family offices in a way!!) the luxury of watching developments from the sidelines. Trying to find the holy grail of an undervalued stock in today’s market is unrealistic and fanciful in my opinion, given the resources of a lone investor at one’s disposal. So I tend to let my attention drift to whatever comes my way with the intention of broadening my mind and maybe broadening my list of stocks to keep an eye on.

That brings me to my visit to the dentist last week. My visit was primarily to get a new crown on a neglected tooth. I had rescheduled the appointment a number of times and as a result had not really thought about the procedure beforehand. Compared to a similar procedure a number of years ago, the process was totally different. First off, my mouth was scanned by a camera and a 3D image of my teeth was produced. I was then asked to wait in the reception for 20 minutes and upon my return the ceramic crown was ready having been produced in a milling machine onsite. The crown fit perfectly and was easily fitted. My dentist conducted the procedure using a new one-day crown system produced by a German firm called Sirona Dental Systems. The system includes a computer that takes digital images of the damaged tooth, software to design the crown and a milling machine. There have been some concerns about the use of such crowns for front teeth due to colouring issues or the suitability of such crowns for people who grind their teeth heavily. Within my mouth, I have a live comparative test of a laboratory fabricated crown and a new one day procedure produced one. It will be interesting to see how the new crown gets on!

I had previously heard about new technology that could impact the dental sector. A specially designed camera, fitted to a smart phone, can scan your mouth and then send a 3D image to a central database whereupon a panel of dental experts could diagnose the issue and then submit the recommended procedure to a marketplace of dentists to provide a quote on a solution. Naturally, my dentist was skeptical on diagnosing problems with a smartphone scan! Given my first experience with a scan, I think such ideas may have potential to disrupt a protected professional sector. As a further illustration of how technology is impacting medicine, this article on a new app that can turn a smartphone into a highly portable and low cost eye scanner to diagnose eye health issues in remote areas is interesting.

So I had a look at Sirona, ticker SIRO, who coincidentally reported quarterly results last week. SIRO’s year end is September and, based upon an estimate for Q4, revenue has grown on average by 9% for the last 3 years with operating income by 15%. The stock price has doubled over that time. The graph below shows the share price since 2007 and the 12 month trailing PE ratio and the next 12 months (current quarter and estimated next 3 quarters) PE estimate.

click to enlargeSIRO Share Price & Earnings Multiples

SIRO’s revenue is split into 4 main segments: dental CAD/CAM systems (such as the one I experienced), imaging systems, treatments centers, and instruments. The first two segments are the larger making up approximately 35% of revenue each and are the higher growth and margin segments. Each are described below:

  • Dental CAD/CAM systems address the market for dental restorations, which includes several types of restorations, such as inlays, onlays, veneers, crowns, bridges, copings and bridge frameworks made from ceramic, metal or composite blocks. SIRO estimates it has an approx 15% market share in US and Germany.
  • Imaging systems comprise a broad range of systems for diagnostic imaging in the dental practice. SIRO has developed a comprehensive range of imaging systems for 2D or 3D, panoramic and intra-oral applications that allow the dentist to accommodate the patient in a more efficient manner.
  • Treatment centers comprise a broad range of products from basic dentist chairs to sophisticated chair-based units with integrated diagnostic, hygiene and ergonomic functionalities, as well as specialist centers used in preventative treatment and for training purposes.
  • SIRO offers a wide range of instruments, including handheld and power-operated handpieces for cavity preparation, endodontics, periodontology and prophylaxis, which are regularly updated and improved.

The graph below shows the historical segment & geographical revenue split and the historical operating margin.

click to enlargeSIRO Revenue Split & Op Margins

The growth in operating results is impressive, as is their balance sheet and cashflow. The issue is one of valuation with SIRO trading around 26 times this year’s earnings and about 20 times next year’s projected earnings. However, despite SIRO having some major competitors, they are growing their highest margin segments impressively and, in the vein of Peter Lynch’s philosophy of investing in what you know, I shall be putting SIRO on my watch list to keep an eye on them whilst I do some more research (the most obvious of which is seeing how my crown gets on!!) and wait for a better entry point.

Speaking of valuations, my dental experience did get me thinking about the much hyped 3D printing sector. The number of applications for 3D printing continues to grow from construction, to aerospace, to medical/dental, to fashion, to biotech, to a whole host of industrial design applications. Wohlers Associates project a CAGR of 30% for the sector over the next few years (I’d love to know on what basis these guys come up with their projections). I had a brief look over two of the most hyped firms in the sector – Stratasys Ltd (SSYS) and 3D Systems (DDD). Historical comparisons are difficult as both companies have been aggressive acquirers. SSYS has had more favourable results of late compared to DDD due to SSYS acquisition of MakerBot and to DDD’s recent stumble due to heavy investments in growth. A quick snapshot of some metrics since 2011 are in the graphs below.

click to enlargeSSYS & DDD Share price revenues and earnings multiples

With SSYS and DDD trading at 36 and 40 times next year’s projected earnings respectively, these firms are not for the faint hearted. Hyper growth stories in new sectors are normally areas outside my comfort zone due to the inherent uncertainties. In this case my experience at the dentist may mean I will do some more digging in the future of this new technology, time permitting. For the sake of curiosity if nothing else.

Deflating Bubbles

The market is currently full of overdue anguish, with the air coming out of some of the frothier areas of the market notably in the biotech and internet sectors. To get an idea of the movements, I had a quick look at the S&P500 against a number of other indices such as the Powershares S&P high beta, S&P low volatility, & Nasdaq Internet ETFs plus the Nasdaq Biotech Index (SPHB, SPLV, PNQI & NBI respectively) as per the graph below.

click to enlargeS&P500 vrs SPHB SPLV NBI PNQI

One of the more amusing bubbles in the recent run-up has been that surrounding the creeping legalization of cannabis in the US. Penny stocks in the sector, as if straight out of “The Wolf of Wall Street”, have been rocketing. Some of the more dubious firms have jumped on the bandwagon by coming up with fanciful plans on exploiting cannabis markets after having tried their luck as software, oil exploration or even tanning companies! Firms such as CannaVest (CANV) and Vape Holdings (VAPE) have shown classic pump & dump penny stock rises and falls in recent months.

One stock that has rode both the biotech and the cannabis buddle is a UK firm called GW Pharmaceuticals (GWP.L) founded in 1998 to develop cannabinoid prescription medicines to meet patient needs under medical supervision. Their main product, Sativex, a treatment for moderate to severe spasticity is approved or near approval in a number of countries such as Norway, Israel, and Austria. Bulls point to approval in the US of Sativex and the potential for other cannabinoid products in areas such as cancer and diabetes to justify the current valuation of multiples of revenue for this loss making firm. GWP has risen from 50p last year to a high (forgive the pun!) of 400p in March with a fall back to 250p recently. Cannabis stocks offer the ultimate high for aging stoners, add in some biotech hype for GWP and the sky is the limit to a happy ever after fantasy……….will people ever learn!

To me, the deflating of sector bubbles is a very healthy sign of a rational market.  Whether an outbreak of rationality will last is another matter.